Frank diagnosis: We have a case of 'luxury fever'

Economics Professor Robert H. Frank speaks to a Summer Sessions audience in Kennedy Hall July 14. Charles Harrington/University Photography

By Lina Katz '99

"We are in the grip of a luxury fever," Robert H. Frank, the Goldwin Smith Professor of Economics, Ethics and Public Policy at Cornell, told a packed crowd in Kennedy Hall's David L. Call Alumni Auditorium July 14.

The audience was gathered to hear Frank's lecture "Luxury Fever: Money and Happiness in an Era of Excess," which was based on his recent best-selling book, Luxury Fever: Why Money Fails to Satisfy in an Era of Excess. In his lecture, Frank examined the negative effects caused by spending on luxury items, noting that their prices have drastically escalated in recent decades. The evolution of spending patterns on items from gas grills to luxury cars is part of a much broader consumption boom in recent decades, he said.

"No matter where you stand on the income scale, no matter how little you feel you are influenced by what others do, you cannot escape the effects of this spending spree," Frank said.

Rich and poor alike are spending more time at the office, taking shorter vacations and spending less time with loved ones. And while spending on luxury items is growing four times as fast as overall spending, and national income is now more than $8 trillion a year, our public infrastructure, educational institutions and inner cities continue to deteriorate, Frank said. He argued that by reducing the rate of growth in luxury consumption, we could afford to repair our nation's crumbling infrastructure or be able to spend more time with friends and family.

Frank cited studies that demonstrate that conspicuous spending on luxury items does not lead to increased happiness. When everyone acquires bigger houses and more expensive automobiles, the newer standards become the norm, yielding little lasting satisfaction. However, redirecting the same resources could bring permanent increases in health and happiness, he argued.

"If we would be happier spending less conspicuously, why don't we just do it?" he asked.

The answer, he said, is that people evaluate everything based on its context. We are pushed into spending more on luxury items because those around us are spending more on luxury items.

"Our problem, in short, is the incentives that guide individual spending decisions are much like those that generate military arms races. Spending less would be better, but only if everyone did it," wrote Frank in the article "Our Climb to Sublime; Hold On. We Don't Need to Go There," published in the Jan. 24 Washington Post.

The history of trying to curb conspicuous consumption has been a failed one, Frank said, because economists have failed to account properly for the role of context and incentives in economic decisions. As a corrective, he proposed discarding the current income tax system in favor of a more steeply progressive consumption tax. Instead of paying taxes based on income, each family would pay based on its total spending, as measured by the differences between its annual income and its annual savings. Tax rates on the highest spenders would be significantly higher than the current top tax rates on incomes, in order to account for the fact that the rich are able to save and invest much more than the poor.

And, Frank argued, the consumption tax would not sacrifice the satisfaction people get from luxury goods, since context and relative spending, rather than absolute spending, is what controls satisfaction. As those who spend the most begin to save more, the consumption standards that those who spend less feel compelled to meet would relax, freeing up resources that could help pay for restoring infrastructure or for cleaner air and water, for instance. Frank estimated that people could spend roughly one-third less on luxury consumption -- roughly $2 trillion per year -- and suffer no significant reduction in satisfaction.

In our tax-phobic country, however, it might take years of debate to build consensus for changing the system, Frank pointed out. Meanwhile, the luxury-spending boom will continue, he said.

Audience member Eric Brody of Greenwich, Conn., a Cornell Summer College student, said he enjoyed the lecture, but he questioned the practicality of Frank's proposals.

"The idea of everyone scaling down their level of consumption is good, but there is little that can realistically be done. Changing incentives, however, is an idea to ponder," Brody said.

Senior Ilona Parkansky agreed with Frank's goal of redirecting spending from luxury items to funding more substantive programs.

"Frank's proposals aim to bridge the gap between the rich and the poor, so that we can focus on more productive things than simply the ongoing struggle for competitive advantage," Parkansky said.

Frank's lecture was part of the School of Continuing Education and Summer Sessions' Wednesday night lecture series at 7:30 p.m. in David L. Call Alumni Auditorium.